U.S. stocks gained ground yesterday but it was a wild ride as traders faded the open (the major indices began the day higher – Dow Industrials up 255 pts out of the gate), sending the broad market down 1% with less than an hour in the session.  But a re-rally in the final minutes helped most stocks close meaningfully in positive territory.

Only the insane would try to explain the market’s behavior yesterday, which is why I’ll try.

What is safe to say is that a number of things weighed on traders’ sentiment, which can explain the reason traders faded the open.  The latest bailout plan from Europe is seen as just another insufficient backstop (as if anything short of default for Greece and Portugal would work) and the day’s economic data failed to impress.  In addition, while Europe’s troubles have been the focus, Asian growth continues to slow. You may remember the erosion within China’s manufacturing reports we’ve talked about over the past couple of months.  Further, the major Asian stock indices suggest weakness and the 30% plunge in the price of copper is also a clear indication of the deterioration.

Explaining the market’s spike off the session lows in the final minutes of trading is a bit more difficult.  I’ll just take a stab at it and say it was algo trading, no doubt computer-generating trading is dominating activity right here.  Many of these algorithms are based on the activity within the Dollar Index – that index rises and it signals risk off, it falls and signals risk on.  Maybe some algos were triggered to buy as the Dollar Index fell in the final minutes of the session.

Consumer discretionary and tech shares led the losses.  The former was driven by the latest Bloomberg Consumer Comfort reading, which fell to the second-lowest level in the measure’s 26-year history, and the latter by weak results from chipmaker AMD.  Financials, utilities and industrials led the market higher.

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U.S. stocks halted a three-session winning streak even as the EU moved a little closer to agreeing to the July 21 expansion of the EFSF (EU bailout fund) – and have all but made it official this morning with the German vote.

So why did stocks sell off?  Well, no one cares about the July 21 proposal any longer because the market had moved onto hoping that something much bigger and better would ensue – a plan that would leverage the EFSF to the hilt and able to make all of the eurozone’s troubles magically disappear.  But after German Finance Minister Schauble called the plan (supposedly devised by U.S. Treasury Secretary Geithner) to massively leverage the EFSF a “stupid” idea, it pretty much put  to bed what the market had rallied on over the previous couple of sessions.

Telecoms, utilities and tech outperformed the broad market – although even these groups lost ground too.  Basic materials, energy and financials led the market lower.

The CRB Index retreated for the eighth session in 11, sending this measure of commodity prices back to the 303 mark – down 17% from the April multi-year peak.  This isn’t a scientific analysis, but I watch to see of the CRB holds that 300 level.  If it does, it means the risk trade probably has some intermittent life.  If it slides down to 275, it probably means traders will run from risk for an extended period…until of course the Fed comes back with more QE, at which points commodities will rally again.  (And that may not take too long as Bernanke gave a speech last night in which he hinted the Fed is willing to move deeper into the domain of unconventional policy action.)

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More and more people want to know if they should buy gold today, so I ask the question: why do you want to own gold?  Simply because it has gone up in value doesn’t make it a good investment today.  Although most individual investors would never admit it, this is exactly the reason they are intrigued by gold’s prospects.

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U.S. stocks rallied as the broad market extended the latest bounce to three sessions, recouping most of last week’s losses.  But in the final minutes the major indices gave back much of the gains as the Financial Times reported that various euro-zone governments still have no appetite to bail Greece out as that country’s funding hole continues to widen.

Watching this market, one minute euphoric that the next rescue is just around the corner and the next commiserating that policymakers will leave things to their own devices, would be comical if the economic and fiscal situation of Western society weren’t so troubled.

Basic material, industrials and energy led the rally.  Utilities, financials and consumer staples were the underperformers.

This latest three-session rally is largely about the EU/ECB coming up with some big-bang plan to erase the debt problems that currently plague Western Europe.  But the EU is taking on even more debt -- and potentially even deeper consequences as the relatively healthy economies of Germany and France backstop yet more toxicity -- and all to escape the default of a tiny economy like Greece and an even smaller Portugal.  For some time now we’ve mentioned that a Greek default wouldn’t be all that bad, outside of the first few weeks of the event.  But instead they continue to delay the inevitable. Instead, they (and we can say us as we engage in the same practice) continue to try to solve the problem with the same policy (more debt) that got them into the problem.

It seems to me the market should shake in fear on the purported policy decisions that will add the very leverage that brought us to this state in the first place – that to me seems to bring on far more trouble down the road than a Greek default would cause in the short term.  But then again, the markets have been so manipulated and distorted by this culture of never-ending bailouts that a short-term mindset dominates the marketplace.  The up, down and nowhere market environment continues.

Indeed, the short-term focus among Western-economy policymakers’, which will continue to have detrimental effects on multi-year growth potential, is not only highly annoying but flat out moronic.  Just as our own policies have tried to do, the Europeans are attempting to buy time. But if rapid economic growth fails to ensue, then you’re not buying time at all. Our policymakers are idiots.

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U.S. stocks extended the latest bounce as traders continue to watch for the next easy “fix,” and it seems the ECB (European central bank) is in the process of delivering just that.  The gains of the past two days have recovered about half of what the S&P 500 lost last week.

It wasn’t a straight up shot yesterday though as U.S. and European bourse had to get past some weakness about an hour into our trading session.  (It didn’t seem all that volatile of a session if you weren’t watching closely, but it was as European bourses and U.S. futures were up big prior to our open only to slide about an hour into our session – Europe nearly erased 3-4% gains with just an hour left in their trading day. But then this talk of sweeping the debt problems under the rug for a bit longer began to surface and markets on both continents rallied.)

During this current trading range in which we’ve seen stock prices vacillate between 1120-1220 on the S&P 500, we’ve now tested that low-end 1120 level three times now.

As readers of this letter are surely aware, I expect the broad market to slide well below that 1120 level (be prepared for 900-950 on the index, which I see as fair value) – something I’ve talked about mentally preparing for since late 2009 when the S&P 500 powered to the 1160 mark, which is exactly where we sit this morning.  However, we’ve bounced back off of that recent low yet again and that has offered some confidence for traders to step up and do some buying.

That latest quick “fix” that’s being talked about is a proposal to create a European Investment Bank that issues debt to purchase government debt – that’s right, issuing debt to buy debt – and increase the EFSF (eurozone bailout fund), which means issuing even more debt, to recapitalize the banking system.  Keep in mind that the EFSF is already of fund of debt as it borrows the money needed to bailout the PIIGS.

More below…

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U.S. stocks were able to break a four-session losing streak on Friday, a series of losses that measured 7%, as a combination of things took place on Friday – surely some short covering, some “bargain” hunting and then there was also talk of several more policy proposals coming over the next few week.

Consumer discretionary, tech and financials led the bounce.  Energy and basic material shares remained on traders’ sell list as metals and energy prices closed down again yesterday.  Consumer staples also closed lower.

The price of crude closed at $80/bbl, trading below that mark for much of the session.  It’s not like oil companies can’t make big margins at $80, but the concern is the price continues to slide as the chance of recession has spiked.  The metals complex was led lower by the prices of silver, nickel and copper.  Dr Copper, as people like to call it because its direction often corresponds with the economic path, has slid 22% in three weeks.

Early trading suggest we’ll extend that Friday bounce to a two-session winning streak as European bourses are up about 3% across the board and U.S. futures point to a strong open.

The IMF met in Washington this weekend but nothing occurred, except for an admission from its Managing Director LaGarde that the IMF doesn’t have the resources to meet Europe’s potential lending needs.  Nonetheless, the West will continue to obfuscate rather than solve (which only economic growth and time can do) its debt problem.

As we continue down this road of obfuscation, what’s helping things this morning is the belief that the ECB, in addition to buying government bonds, will restart its covered bond purchase program in an attempt to free up bank balance sheets and spur more lending.    Obscuring debt with more debt (whether it comes from the IMF, the EFSF (EU bailout fund), the ECB, or our own central bank), will only drag out this period of stagnation.  There is no will to engage in the policies that will spark longer-term growth because of the economic pain that may take place in the short term.  The sad reality is that what we’re doing fails to deliver even a short-term benefit.  More in the full Insight.

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U.S. stock indices traded ugly again yesterday – but at least not as ugly as European and Asian bourses, which were off by 4% across the board – as the market once again is in the process of pricing in recession/European financial chaos.  The broad market has returned to the low end of the trading range we’ve been stuck in since early August, the third time we’ve tested this level of 1120 on the S&P 500 in six weeks

The global scene deteriorated a bit more on Wednesday night/Thursday morning as a preliminary survey of Chinese manufacturing activity printed contraction for September, followed by the eurozone’s main factory gauge showing contraction for the first time since mid 2009.   Also, there was news that French bank BNP Paribas is in talks with Qatar to raise capital, even as the bank continues to say they don’t need more capital – yeah, sure.

Also contributing to this latest sell off is a growing concern that maybe central bankers are running out of tools.  I don’t believe the Fed ever had the tools for this environment, at least not in terms of bringing the economy out of its funk.  Sure, they can provide liquidity to a banking system that continues to need it, but monetary policy can’t erase our central problem – too much debt.  In fact, the mistaken monetary policy of the past decade that began to drive real rates negative in 2002, thus encouraged the assumption of vastly more debt, is the original cause of our stagnation.

Utilities, telecoms and consumer staples outperformed again.  Basic material, energy and industrials took on the heavy water.

The price of crude slid nearly $6 to close at $80.17, which is down from $90 a week ago.  Wholesale gasoline finished at $2.55, which is off more than 20 cents in five sessions.  These declines are nice, but as we’ve talked about for a while now, the only reasons energy prices fall these days are hardly consumer friendly.

The Treasury market rallied hard as a result of the Fed’s brilliant (biting sarcasm) Operation Twist and deep worries over where we’re going economically.  The yield on the 10-year slid to 1.72% and the 30-year to 2.79%.

The latest equity-market rout continues this morning as Asia and Europe trade lower and our futures point to another deeply negative open.

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Michael Lissner writes about the dramatic changes to 401(k) fee disclosure requirements and the tremendous fiduciary responsibility for business owners, trustees, and financial advisors of 401(k) plans.  

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U.S. stocks extended the latest losing streak to three sessions as traders showed their dismay that the Fed isn’t actually printing more money via their latest policy action – Bernanke & Co. will just shift the duration of their balance sheet along with holding more mortgage-related positions than would have been the case prior to this latest move.  I didn’t think anything more than simply shifting maturities was expected, so not sure why we’d trade down on that news.  Maybe it was the more negative tone in the statement that drove the market lower, but the fact that this economy is in real trouble is no surprise either.  In any event, The Bernank seems to have disappointed stocks for the first time.

Tech, utility and consumer staples outperformed – although these groups closed lower too.  Financials, basic materials and industrials got wacked by more than 4%.

The much anticipated Fed decision arrived and their traditional statement that follows each meeting portrayed what we should already have known: The economy remains anemic and there are significant downside risks to an already low economic situation.

So that’s the economic statement, but what the market was really watching was the degree to which Bernanke would employ Operation Twist (officially called “maturity extension” by the Fed).  And, it will involve outright selling < 3yr Treasury bills/notes and buying > 6yr Treasury notes/bonds ($400 billion worth of this “twist” through June 2012).  In addition, principal payments from its agency and mortgage-backed security holdings will be reinvested back into mortgage-related positions – previously these pay downs were to be going into the Treasury market.  (The same three Committee members that dissented to the August decision to state that fed funds will remain at the zero bound also dissented to this latest move.)

This action is primarily focused at the housing market as they hope to drive mortgage rate even lower via the longer-dated Treasury purchases and by holding the current level of mortgage securities constant.  Is it an interest rate issue that plagues the housing market though?  Well, I think we all know the answer to that by now.

Of course, Operation Twist has been in effect for a while now as the bond market has expected this action and already begun positioning to that expectation.  See:

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U.S. stock indices defied a bevy of troubling realities for most of yesterday’s session before succumbing in the final hour as most closed lower.  The Dow Industrial Average bucked the trend as it was able to manage a slight gain thanks to shares of IBM.  However, the Dow Transportation Average took a 1.50% hit, which is not a good sign for Dow theorists who carefully watch for when these two indices diverge – although there are so many variations of this theory, it’s difficult to lend much credence to the view. 

Utilities extended their lead as the best-performing sector year-to-date, with health care and telecoms also outperforming the broad market.  Basic material, industrial and energy shares led the losses.

The scene in Europe didn’t get any better as the Greeks have come through with nothing since stating 36 hours ago that they were close to following through on EU/ECB/IMF (the troika) demands. 

In addition, the largest PIIGS economy – Italy – has seen its CDS (insurance against default) rise to a new record.  S&P cut Italy’s credit rating on Monday night as they finally acknowledge that neither economic growth nor their budget picture will improve over the next couple of years – the EU is praying that Italy doesn’t go Greek, to paraphrase Bret Stephens.  What’s more, a gauge of German investor confidence fell to the lowest level since December 2008.   And then, the IMF went ahead and further reduced growth forecasts for the EU, U.S. and the world – although people should have factored in long ago that their forecasts are worthless.  So not so good over there, or anywhere else for that matter. 

The FOMC closes its two-day meeting this afternoon and since that meeting was extended to two sessions back in August (originally meant to be a one-day meeting) traders have expected the Committee to roll out the next round of stimulus.   What everyone expects is that Operation Twist we’ve talked about for some time now (extending the duration of the balance sheet by selling short-dated bonds and buying longer-dated issues) and possibly eliminating the interest paid on excess reserves at the Fed so to encourage banks to lend more.  Of course, there must be demand for those loans, which is something the Fed has zero control over in an already debt-laden environment.  

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